Getting emotional

Weekly Updates

One definition of an asset is a store of value, free from emotion. While analysts can disagree about the relative importance of the things that drive an asset’s value, the value is objectively determined. But this does not work when emotions drive the price.
This definition means things like art or crypto would not be assets. Emotion is important to the price art, and pretty much all there is to the price of crypto. Further, when the price of something normally considered an asset is driven by emotions, it ceases to behave as an asset and becomes a bubble.
Emotion might add to the appeal of buying. A sense of community and building emotional ties with like-minded people keeps buyers enthusiastic. They become reluctant to sell—as selling might exclude them from the community.
Nonetheless, emotion matters in economics. The dislike of loss (“loss aversion”) is a powerful emotion that magnifies the pain when prices fall. That pain can change people’s general economic behavior. Economically, loss aversion matters if something is widely owned (like housing). Falling crypto prices, as something held by only a tiny proportion of the population, is much less economically significant. The loss produces a very strong response that is very narrow in its impact.